Resource adequacy has been an increasing concern in many areas of the country. With reserve margin levels anticipated to fall below target levels by 2014, authorities in the Texas region have over the last few years taken steps aimed at addressing this concern. These efforts will serve them well. Gerry Cauley, President and Chief Executive Officer of the North American Electric Reliability Corporation, in a January 7 letter to Trip Doggett, President and Chief Executive Officer of Electric Reliability Corporation of Texas (“ERCOT”) (“NERC January 7 Letter”), requested a report by April 30 2013 of “ERCOT’s plan to address the declining reserve margin and projected capacity shortfall including a discussion of the risks to reliability if new resources are not constructed or acquired in the short term. The report should include a summary of actions planned … a timetable by which NERC can track progress … [and summaries of any] corresponding [Public Utility Commission of Texas] policy decisions.” NERC January 7 Letter at p.2.

The electricity market of ERCOT is by design an “energy-only” market, with operations and investment largely determined by energy prices. A 2012 report of the Brattle Group, commissioned by ERCOT, ERCOT Investment Incentives and Resource Adequacy, makes the contrast clear. Other (not energy-only) markets in the U.S. maintain minimum reserve margins through regulated planning, resource adequacy requirements, or capacity markets, with investment supported by long-term contracts or market-based payments reflecting contributions to resource adequacy. With an energy-only market, realized reserve margins are the result of private investment decisions based on wholesale prices.

The commissioning of the Brattle Group Report reflects ERCOT’s commitment to taking steps to address resource adequacy while maintaining a market-based structure. Consistent with this approach, the Public Utility Commission of Texas (PUCT), which oversees ERCOT and the Texas electric market, has several proceedings related to resource adequacy (e.g. proceedings in Project Nos. 40000, 41060) and has considered and received public comment on various proposals, including a follow-on Brattle Group paper, Resource Adequacy in ERCOT: ‘Composite’ Policy Options (October 25, 2012) and a proposal developed by Harvard Professor William Hogan filed in the PUCT proceeding (Project 40000) by IPR-GDF SUEZ Energy North America, Inc. The latter is under active consideration by the PUCT in Project 40000. A chart developed for the PUCT in this docket sets forth a timeline for ERCOT and PUCT staff studies related to resource adequacy and is an overview of some of the specific issues under consideration.

Some changes have already been taken in the region: The PUCT increased the system-wide offer cap to encourage new investment and ERCOT revised its protocols so that units can be called into service if needed. ERCOT also initiated its first Seasonal Assessment of Resource Adequacy that evaluates seasonal reliability risks associated with resource adequacy. ERCOT’s Chief Executive Officer, Trip Doggett noted these steps in a January 16, 2013 statement responding to the NERC January 7 Letter. He also observed that addressing the issues calls for “decisive action,” and noted the variety of tools that can help to maintain a reliable and stable grid, including two that can help in tight electric conditions — further development of voluntary demand response options and expanded communication capabilities that improve consumer awareness and encourage conservation. He also indicated ERCOT’s willingness to continue to work with the [PUCT], NERC, Texas Reliability Entity and ERCOT market participants.

Mr. Doggett did not review all of the region’s considerable efforts in studying the question of resource adequacy, but these ongoing efforts should serve the region well. While ERCOT and the PUCT have difficult choices before them, they have taken steps to be well-informed. Currently under consideration are two ERCOT “interim solutions” to achieve the proposal suggested by Professor Hogan regarding an operating reserve demand curve to promote reliability and support scarcity pricing. “Interim Solution A” involves scarcity pricing in the real-time energy market by modifying generator offer curves, and “Interim solution B” involves scarcity pricing in the real-time energy market by valuing operating reserves. Recently, on February 13, 2013, ERCOT filed a presentation of its analysis of Interim Solution B with the PUCT. This paper provides a methodology for determining an operating reserve demand curve, examines the impact of different assumptions for the operating reserve demand curve and provides a backcast analysis using 2011 and 2012 data.

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